After the ECB and the Fed, it is the turn of the Chinese central bank to frankly ease its monetary policy. What impact on the stock market and bitcoin?
PboC imitates Fed
China's central bank was quick to react after the Fed cut its key interest rate by 0.50% to 4.75%.
The People's Bank of China responded by cutting its key interest rate by 0.20%, to 1.5% from 1.7%. That's twice the usual 0.10% cut. It's the sixth rate cut since March 2020, when the rate was 2.4%.
Above all, the PboC has reduced the required reserve ratio, which is back to its lowest level since 2018. In short, banks will be able to create more money out of thin air relative to their reserves.
This is the first time since 2015 that reductions in these two monetary parameters have been announced in tandem.
As a result, the yield on 10-year Chinese government bonds has fallen to 2%, a historic low. The US government is borrowing at 3.70% and France at 2.90%.
This monetary easing should allow China to issue at least 10 trillion yuan ($1.42 trillion) of very long-term government bonds. Compare this with the government's annual budget of $4 trillion.
These loans will be made over the next two years, he said. Liu Shijinformer deputy director of the Development Research Center of the State Council, China's top executive body.
China can afford it. Inflation has been virtually non-existent for over a year. On the other hand, it remains to be seen whether Western monetary easing will not revive inflation…
Chinese stock market rises
Chinese stock markets have been moribund for years, weighed down by the risk of Western sanctions and the real estate crisis.
It is important, however, to differentiate the current situation from the US financial crisis of 2008. The problems were mainly focused on real estate developers rather than on individual defaults. The Chinese banking system was not shaken.
The fact remains that Chinese stock markets have lost the equivalent of $6 trillion in capitalization over the past four years. The Shanghai Stock Exchange was down 7% before the PboC's announcements.
After a fall of -10%, -8% and -15% in the Hang Seng, Shanghai Composite and Shenzhen Component indices at the start of the year, we are now at +14%, -2% and -9% respectively.
Here is the evolution of the index of the fifty largest Chinese companies since September 11:
The rebound is due to the fact that investment funds and insurance companies will be able to draw on the PboC's funds to buy stocks. We're talking about 800 billion yuan ($113 billion).
Enough to support valuations that are stagnating at a 10-year low. The Shanghai Stock Exchange's price-earnings ratio is at its lowest since the end of 2014. According to MorningstarChinese stocks are undervalued by 31%.
Is this enough to attract capital from petromonarchies and other nations wishing to reduce their exposure to Western nations? The specter of the freezing of Russia's $300 billion foreign exchange reserves remains alive…
That said, caution will remain the order of the day as long as geopolitical tensions are so high. Donald Trump's threats of deadly customs duties will fuel uncertainty.
Monetary easing bodes well for bitcoin
Sure, exchanges are banned in China. You can't go to a site like Coinbase or Binance to buy bitcoins. You have to meet in person. Undercover bitcoin sales are on the rise in Hong Kong.
With these murderous laws having slowed the adoption of bitcoin, China is ranked twentieth in the world by Chainalysis, which is not typical of the country. According to its 2024 reportSouth Korea has bought as many bitcoins as China despite having a population 33 times smaller.
The launch of Bitcoin ETFs in Hong Kong suggests that things are slowly moving in the right direction. But for now, the Chinese government has very little appetite for what it sees as speculation and a way to circumvent its capital controls.
Unfortunately, Xi Jinping's government still refuses to see bitcoin as the next international reserve currency. It clings to gold even though bitcoin is vastly superior to it in every way.
Perhaps things will change when China opens its capital markets further to avoid being shut out of European and American markets.
In the meantime, monetary easing around the world bodes well for asset prices, especially bitcoin. Don't miss our article: Bitcoin – The Four Pillars of the Next Bull Run.
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